Virtual currency, an Internet oddity, sees value go from $266 to $40 in just a day

It’s a promising form of electronic cash free from central bankers and beloved by hackers. It — Bitcoin — may also be in trouble, registering catastrophic losses that have sent speculators scrambling.

Bitcoin is a virtual currency that can be used to buy and sell a broad range of items — from cupcakes to electronics to illegal narcotics. Online exchanges across the world offer a market for bitcoins to be bought and sold against dollars, euros, yen and other currencies.

Although the cybercurrency has existed for years as a kind of Internet oddity, a perfect storm of developments has brought it to the cusp of mainstream use.

As currency crises in Europe piqued investors’ interest, a growing number of businesses announced they were accepting bitcoins for an ever-wider range of goods and services. The value of a single bitcoin began racing upward amid growing media attention, smashing past the $100 mark last week before more than doubling again in just a few days. Then came the crash.

The price of Bitcoin has imploded, falling from about $266 on Wednesday to just above $40 on Thursday, according to
bitcoincharts.com, which tracks trades across the Internet. The best-known exchange, Tokyo-based Mt. Gox, has suspended trading for what it described as a 12-hour “market cool-down.” By late Thursday, the currency was back up to just more than $100.

“People started to panic, started to sell bitcoin in mass (panic sale) resulting in an increase of trade that ultimately froze the trade engine,” Mt. Gox said.

Bitcoins are created, distributed, and authenticated independently of any bank or government. The currency’s cryptographic features make it virtually immune from counterfeiting, and its relative anonymity holds out the promise of being able to spend money across the Internet without fear of censors, regulators or nosy officials.

The linchpin of the system is a network of “miners” — high-end computer users who supply the Bitcoin network with the processing power needed to maintain a transparent, running tally of all transactions. The tally is one of the most important ways in which the system prevents fraud, and the miners are rewarded for supporting the system with an occasional helping of brand-new bitcoins.

From hard drugs to hard currency, songs to survival gear, cars to consumer goods, many retailers have welcomed the money.

Atlanta-based BitPay handles Bitcoin transactions for more than 4,500 companies, taking payments in bitcoins and forwarding the cash equivalent to the vendor involved, which means that its clients are insulated from the cybercurrency’s volatility.

BitPay Chief Executive Anthony Gallippi said many of the businesses he served were e-commerce websites, but he said an increasing number of traditional retailers were looking to get into the game as well. “We just had an auto dealership in Kansas City apply,” he said.

Nicholas Colas, chief market strategist for the ConvergEx Group, said it was a “great question” whether the currency could survive the wrenching ups and downs.